Obama’s First State of the Union a Source of Regret

EDITOR’S NOTE: The rhetoric of deficit reduction has kept the national debate firmly within the conservative frame. As official discourse continues to limit the Administration’s ability to find a creative solution to the problem of growing economic inequality, this article reminds us where it came from came from – President Obama himself. Economic advisers to the Administration quoted below describe the preemptive bipartisanship of Obama’s 2010 State of the Union as a serious mistake. In hindsight, it seems pretty obvious.

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Obama’s First State Of The Union Marked A Turning Point, One His Old Advisers Now Regret

WASHINGTON — For all of the intrigue and attention that surrounds them, presidential State of the Union addresses are often oversold affairs. Yes, there have been memorable moments along the way. The era of big government was declared over by Bill Clinton; the axis of evil was identified by George W. Bush; a war on poverty was launched by Lyndon Johnson.

But on the whole, the annual laundry list of priorities that presidents present to a bicameral gathering of Congress end up facilitating little political output.

As President Barack Obama prepares to deliver the fifth State of the Union of his presidency, that dynamic has been mostly true as well, save for one such address.

On Jan. 27, 2010, Obama appeared before Congress for his first State of the Union and declared that the time for moderate austerity had arrived. It would prove to be a seminal moment for his presidency — setting the stage for years of debate over the deficit and debt reduction — and it would be one that close advisers would come to regret.

“Looking back, I remain disappointed that we were not able to embrace with gusto and then remain fully committed to the ‘barbell’ approach, which combines up-front stimulus and back-loaded deficit reduction,” said Peter Orszag, who was Obama’s director of the Office of Management and Budget at the time. “In retrospect, which always provides more clarity than is available at the moment, the time to have doubled down on that approach (including rhetorically) was probably around the 2010 State of the Union.”

Obama’s first State of the Union address was actually his second speech before a joint session of Congress. Just over a month into his presidency, he spoke to lawmakers about the wobbly state of the economy and the need to spark growth.

All told, the president mentioned the word 16 times during his 2009 address. The word “deficit” was uttered eight times, often as a conditional objective to job creation. Touting the $787 billion stimulus bill that had passed Congress weeks prior, Obama said: “A failure to act would have worsened our long-term deficit.”

Less than a year later, the script from that night had been shelved. In the lead-up to his first formal State of the Union address, Obama dispatched top aides, Orszag included, to alert stakeholders that he would be making a strong push toward deficit reduction. During his speech, he would call for a three-year freeze in domestic government spending, with certain agencies exempt. In addition, as a sign of good faith, the president would institute a pay freeze for his top aides and appointees. And though Congress had blocked the idea, he would use executive action to create a bipartisan commission to lower the debt and deficit. From that moment was born Simpson-Bowles.

Job creation remained the administration’s “number-one focus in 2010,” Obama declared in the speech. And there were no apologies for the stimulus. But deficit reduction was no longer something to couple with an improving economy. It was a worthy pursuit in its own right.

“Families across the country are tightening their belts and making tough decisions,” Obama said. “The federal government should do the same. So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.

“Starting in 2011, we are prepared to freeze government spending for three years,” Obama added. “Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will.”

Some of the stakeholders that Obama’s advisers had sought to soothe were, instead, shocked. In a preemptive strike, AFL-CIO President Richard Trumka spoke at the National Press Club on Jan. 10, 2010, declaring it “bad economics and suicidal politics not to aggressively address the job crisis at a time of double-digit unemployment.” Progressive commentators warned of a reprisal of Franklin Roosevelt turning too soon to austerity in 1937.

But the shift was set. Democrats pushing for a prolonged focus on stimulus had been marginalized.

“It made it impossible for those who wanted a sane macroeconomic policy to argue for a second round of fiscal stimulus, because even the president agreed that the time was to tighten belts,” said Brad DeLong, professor of economics and chair of the political economy major at the University of California, Berkeley.

After health care reform was completed in the spring of 2010, the governing agenda switched to deficit and debt. The conversation went from competing budgets, to the Bowles-Simpson proposal, to a government shutdown threat in 2011, to a debt ceiling standoff later that year, to a failed supercommittee, and ultimately to the 2013 sequestration budget cuts.

The 2010 State of the Union didn’t cause it all. But it helped put the process in motion. Arguably no other State of the Union address during Obama’s presidency has had such lasting ripple effects or continued to burn so painfully for detractors.

“The pivot towards austerity and away from jobs in early 2010 was a catastrophically destructive decision,” said Damon Silvers, director of policy and special counsel for the AFL-CIO.

In a strictly defined sense, however, it worked. The administration didn’t abandon stimulus in full in 2010. A $26 billion state aid measure, assisting Medicaid and teachers, was passed that summer. Congress extended unemployment benefits, and the president signed a bill creating tax incentives for hiring the unemployed. But the state aid was offset with cuts to food stamps. The domestic spending freeze –- “purposefully very small from a macroeconomic perspective,” as Orszag recalled — was enhanced under later legislative agreements. By 2013, the deficit as a share of GDP had fallen from nearly 10 percent four years earlier to 4 percent.

“That is a level of austerity that would make Wolfgang Schaeuble [the German finance minister] blush,” said Jared Bernstein, then Vice President Joseph Biden’s top economic adviser.

But on a broader level, the cost of the pivot was profound. Keynesians quickly sounded the alarm that the recovery needed another boost. But Obama had effectively limited the number of tools at his disposal. Four years later, some of his own advisers see the 2010 State of the Union pronouncements as either premature or misdirected.

“It was a mistake,” said Bernstein, who, to this day, jokingly says he “blocked out” the memory of that State of the Union. “The perception was that the public viewed stimulus spending as wasteful and deficit reduction as responsible,” he said. “And even though many members of the economic team and I think even the president himself recognized that the economy would be better served by a more-stimulus fiscal policy, I think the politics ended up informing the economic policy in a pretty damaging way.”

The politics of that moment were certainly complicated. At the time, there were optimistic readings of the recovery. The second half of 2009 had brought some “green shoots,” bringing a diminished sense of urgency about the fragility of the economy. In addition, some members of the president’s economic team “had great antipathy towards budget deficits,” Bernstein recalled — though all the obvious suspects have insisted that they weren’t of that mindset, at least not then.

And then there were the polls, which showed rising public concern about the deficit and debt, and had left congressional Democrats spooked about the growing tea party protests.

“You have to remember that speech didn’t occur in a vacuum it was really at the beginning of the full-throated counterattack by the tea party forces,” said former Sen. Evan Bayh (D-Ind.), one of the Democrats who cheered the president’s debt reduction focus. “With regard to the spending freeze and capping pay and all that, those were nods to the general public to prove you are not completely tone-deaf.

“2010 was not 2009. A lot had happened in between there,” Bayh added. “The president had to take into account the general environment in which he was operating. Did he have some sort of philosophical epiphany and was that a major inflection point? My answer would be no. He was acknowledging the tone of the times.”

Though the severity of Democratic midterm losses was not yet evident, the party clearly was in trouble. The State of the Union pivot toward the deficit was done, in part, because there was little else that Congress would let Obama do.

“If you are the president, does it really make sense for you to come out and fight tooth and nail for something you aren’t going to get?” asked Bernstein. “I don’t know.”

But the pivot also was pitched, in part, as protection against the electoral wave to come. Politico reported that Obama would “calm the nerves of independent voters who are voicing big concerns with the big spending and deficits.” In retrospect, it was wishful prognostication. Democrats were pummeled.

“If anybody thought those steps would prevent the whirlwind, boy they didn’t get it,” said Bayh.